Managing a Lean Company in an Economic Downturn

by Gembutsu Consulting

A common question many employees have when first hearing about Lean manufacturing and its emphasis on waste elimination is whether the program will result in headcount reduction.  The customary, and correct, response to this question is that no one will be laid off as a result of any Lean improvements even if less operators are required to perform the work.  While this sounds straightforward enough, what is a Lean manufacturer to do if business demand is cut by 50% or more and the company can not post a profit without eliminating jobs? How is a Lean manufacturer to manage in the economic reality of shrinking orders and significantly lower customer demand? Indeed, this is a reality for many manufacturing companies in today’s economic climate. This article offers some clear guidelines how to manage a Lean manufacturing deployment program in a recessionary economic environment.

The harsh reality about layoffs is that if economic conditions deteriorate to such a level that a company no longer has the need for a significant amount of its workforce, no amount of short-term kaizen focus will solve the labor variance problem and downsizing actions will be required.  While a company should always strive to avoid this predicament, the reality is that economic downturns are not always foreseen. However, even in the face of layoffs, it should be made clear to employees that any workforce reductions are a result of a fall in business which is out of the company's direct control and not because of Lean successes. While this sounds simple enough, in reality it can be a hard sell on a shop floor.  Indeed, after the sharp economic decline after September 11, 2001, many plant managers and their staff were confronted with the challenge of simultaneously cutting heads without slowing the momentum of the Lean transformation process.

Managing the Layoff Process
To begin, a company's human resources policies will guide the process regardless of whether the company is on a Lean journey or not.  In addition to legal requirements, there are clear ethical reasons for HR's role. A common method used for large layoffs is to use a point based grading system to determine which employees will be the first to go. Such a system scores each employee based on a number of criteria.  The more points a person receives, the less likely they will be let go.  For example, employees could receive points based on:

1. Seniority within the company
2. Past performance as identified in quarterly and annual performance reviews
3. Specialized knowledge, especially if a particular license or certification is required to perform a job

In addition, retention points may be awarded based on participation in kaizen workshops, the number of implemented continuous improvement suggestions, or having served as a rotational resource in the Lean Promotions Office (LPO). Regardless of the method used, a well developed process that is used consistently will make the layoff decision much smoother.

When communicating the reductions, the Lean initiative must be separated from the layoff plan as much as possible. In practice this means clearly explaining the correlation between the fall in business and the corresponding headcount reduction. It should be made clear that the layoffs are happening because it is necessary for the business to survive and not because of any employee-lead productivity improvements.

In addition to following a company’s human resources policies, the bedrock of a well managed layoff is clear communication with everybody. While most every manager agrees with this need to communicate, they often have differing ideas of what constitutes adequate and informative communication. To put this idea into perspective, consider the time your company dedicates to human communication each year.  As an example, holding a 1-hour town hall meeting each quarter amounts to less than 0.2% of a working calendar year. Expecting every employee to have a clear sense of the layoff process after posting a memo on a communications board or following a quarterly 60-minute meeting is unrealistic.  It is not adequate communication and will not enable people to understand what is going on with regards to layoffs (or anything else). To be effective, communication must be frequent, consistent and clear.

To achieve consistency, employees should hear the same message from all levels of the company. Whether at a formal town hall meeting with the CEO, at a daily 5-minute production start-up meeting or anywhere in between, employees should hear the same general message. Accomplishing this requires that all senior mangers understand the CEO’s vision and in turn clearly communicate this across all shifts with their respective managers, supervisors and leads. While the specific method of communication will depend on things like the managers’ style and company culture, when it comes to frequency, a strict rule of thumb in the Lean world is that it frequent equals daily. This of course does not mean that the VP of Operations will meet with each employee each day. However, every employee who has direct reports should be expected to have daily communication with their team. One of the many benefits of this is that it ensures that a formal communication process in place, which can be used to share good and bad news alike.

Of course, a company-wide memo from the CEO accompanied by the occasional town hall meeting is by no means off limits. In fact, when employees hear the same thing from their direct supervisor as they do from the CEO, it often boosts morale, even if the fundamental message is bad news.

When the layoff does take place, it is best to do it quickly instead of in a drawn out process.
Short Case Study:

One consumer products manufacturer in the Southeastern United States came up with a unique layoff process when they were faced with a 35% (143 employees) workforce reduction. The plant manager called a town-hall meeting announcing that the layoffs would take place over the next 3 days. Each employee was handed an envelope containing a note with their name, a day and time on it. Each employee was to report to the HR conference room with all their personal belongings at the time indicated in the envelope. Anybody who did not show up during their time slot was automatically let go (it was surprising how many people took this option). Since everybody received an envelope, nobody knew who would be laid off and who would stay.  While a little cold hearted, it was determined to be much colder to call people off the shop floor and escort them one by one to the human resources conference room. Of course, a few seconds after the meeting began each employee knew their fate; either they were let go or were given a short pep talk encouraging them to keep up the good work and sent back to the line.

Managing in a shrinking economy is not fun for anybody. It takes away time from management's focus on improvements, it creates a tension that is felt at every level and of course it is devastating for those who lose their jobs. However, layoffs do not mean that the Lean program needs to be tabled or go through unreasonable setbacks.  When handled competently, the smaller, re-sized company can continue to drive for continuous improvement and operational flexibility. Then hopefully during the next downturn the layoffs can be avoided entirely.